Bestinvest, the online investment service, will this weekend publish the latest edition of its iconic Spot the Dog report, which has been regularly identifying the most consistently poor performing investment funds available to the public since the mid-nineties.
Dubbed “the guide fund managers would love to ban”, it doesn’t win any popularity awards with the financial services industry, but for over a quarter of a century it has helped shine a spotlight on the lack of value added by many investment funds. In so doing it has encouraged hundreds of thousands of investors to keep a closer eye on the funds held in their Individual Savings Accounts and pensions and as well as pressurising fund companies to take action where it is needed.
The latest report has identified 77 investment mutts that invest across a wide range of equity markets across the globe. These funds collectively represent £29.5 billion of long-term savings. The list includes funds managed by some of the most well-known names in the financial services industry such as HBOS, Scottish Widows, St. James’s Place and Fidelity.
Selecting the ‘worst of the worst’
The report analyses funds investing in shares – also known as equities – with a minimum track record of at least three years. Earning a place in Bestinvest’s investment kennel, requires a fund to have met some stringent statistical criteria.
Firstly, it must have delivered a worse return than the market it invests in for each one of the last three 12-month periods on the trot (periods to 30 June 2021, 2020 and 2019 in this edition). This is to focus the list on consistent underachievers rather than those that might have had a very short run of bad luck.
Secondly, a fund must also have underperformed the returns delivered by the market that it invests in by more than 5% over the entire three-year period under review – though the two worst funds in this edition have done so by a staggering -49%! There are a great many other funds delivering pedestrian performance that don’t make it into Spot the Dog.
North America: the graveyard of active fund management
The report covers funds investing across a wide selection of markets, including the UK, Global equities, North America, Europe, Asia (excluding Japan), Japan and Global Emerging Markets in its quest to identify “the worst of the worst”. Some areas are noticeably more prone to consistent underachievers, with the highest count – 19 funds – found in the North American sector, representing (22% of the North American funds universe) confirming its reputation as a region where fund managers struggle to beat the markets. This was followed by 14 European dog funds (14% of the European funds universe).
In other markets dog funds are rare breeds. In the extensive UK All Companies sector just 9 dog funds were uncovered. These represent just 3% of the universe of funds in the UK All Companies sector that were screened. Other areas where dog funds appear on the verge of extinction were Global Emerging Market funds (2 funds) and Japan and Asia (excluding Japan) sectors, both of which had 4 dog funds each. Across all sectors, very few funds focused on smaller companies were found.
Jason Hollands, Managing Director at Bestinvest, commented:
“Since the coronavirus crash in early 2020, equity markets around the globe have bounced back sharply, delivered impressive returns buoyed by ultra-low interest rates, massive stimulus programmes and optimism fuelled by the discovery and roll-out of vaccines. This has pretty much lifted all ships with the tide – so to speak – so even funds that have failed to keep pace with the surge in markets have often deliver seemingly good returns, though 21 of the funds in Spot the Dog did deliver actual losses over the last three years. But in most cases soaring markets have masked the fact that the decisions made by the managers of dog funds have actually detracted from the returns their investors might have received. Such funds represent poor value for money given the fees investors have paid.
“But on a more positive note, the latest report does show a sharp fall in the number of dog funds since our last edition. In a large part this is down to a much better period for managers who target cheap, undervalued shares rather than high growth companies. The sharp rebound in some of last year’s worst hit sectors – such as energy and financials – has enabled a lot of previous offenders to escape inclusion as more recent, shorter-term performance has been strong, lifting them out of our filters. However, it is also the case that some fund groups are raising their game and have been taking action to address poor performance, including changing managers.
”We have also noted once again the continuing scarcity of funds that focus on smaller companies meeting our criteria, despite using us smaller companies’ indices in our search for them. This does seem to suggest that fund managers have a better success rate when investing in less researched parts of the market, which are also off the radar of passive funds.
Hollands concluded: “The key message of this edition of Spot the Dog is not to take it for granted that your investments are doing OK, just because they may have risen in value over the last year. It is really important to periodically spend a little time reviewing your investments and to check how they are doing against the overall market environment, as well as consider whether the mix of investments is right. While sometimes it might pay to be patient with a poor performer – for example, because a new team have been put in place to turn it round – in other cases the right course of action could be to switch to an alternative fund run by a manager with a more convincing track record.”